STOCKS BOUNCE ON WEAK JOB REPORT -- BUT TREASURY YIELDS BOUNCE -- 10-YEAR JAPANESE YIELD HITS FIVE-MONTH HIGH -- S&P 600 SMALL CAP INDEX HITS NEW RECORD -- HONG KONG ISHARES REACH TWO-YEAR HIGH -- EAFE ISHARES END AT 2016 HIGH
S&P BOUNCES BUT ON LOW VOLUME... The stock market climbed on Friday on the weak August job figure on lower expectations for a September Fed hike. Friday's intermarket action, however, was somewhat muted. It's true that stocks jumped, but on lower volume. Chart 1 shows the S&P 500 rebounding off chart support along its early August low and 50-day average. Volume, however, was on the light side. Rate-sensitive stock groups like gold, telecom, utilities, and REITs rebounded as expected. Financial shares, however, held up relatively well, especially banks. That suggests that some traders may be viewing the August numbers with some skepticism. That's partially due to the history of August job numbers being on the low side and revised upward later. After a brief dip, the dollar rebounded. Two- and ten-year yields also bounced. That's somewhat surprising.
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Chart 1
TREASURY YIELDS BOUNCE ON FRIDAY... My Friday message summarized initial market reactions to the weak August jobs report. Most of them were pretty much as expected. A weaker dollar (and higher gold prices), a bounce in rate sensitive stocks like utilities, and a stronger stock market. I mentioned that one surprise was the bounce in Treasury yields. I suggested that might have accounted for why financial stocks, and banks in particular, held up relatively well. Chart 2 shows the 10-Year Treasury Yield bouncing on Friday to end the week at 1.59%. The 2-Year Treasury yield, which is the most sensitive to a Fed rate hike, also ended the day higher. That might suggest that the jury is still out on the Fed. Or, it may simply be a reaction to events in foreign markets.
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Chart 2
JAPANESE YIELDS REACH FIVE-MONTH HIGH ... My August 3 message suggested that the recent jump in Japanese bond yields might be hinting at a bottom in Treasury yields. The middle line in Chart 3 shows the 10-Year Japanese yield ending the week at the highest level in five months. That should give a boost to Treasury yields. I recently suggested, however, that the recent drop in British yields to record lows following the late June Brexit vote was holding Treasury yields down. The red line in the top box, however, shows the 10-Year British yield bouncing to the highest level in a month. [The pound also jumped this week on strong economic numbers in the U.K]. The blue line in the bottom box shows the 10-Year German yield also starting to bounce as well. Lower foreign yields have weighed on higher-yielding Treasuries for the past year. Any hint of higher foreign yields could relieve some of that pressure and allow Treasury yields to start bouncing as well.
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Chart 3
S&P 600 SMALL CAP INDEX REACHES NEW RECORD ... While most of the media focus is on sideways action in large cap stocks, smaller stocks have been rising. The weekly bars in Chart 4 show the S&P 600 Small Cap Index ($SML) ending the week at a new record high. The solid matter is a relative strength ratio of the SML divided by the S&P 500. It shows smaller stocks leading large caps higher since the February bottom. Smallcaps had been market laggards since the middle of 2014. Their relative strength ratio is close to a two-year high. That's a positive sign for them and rest of the market. Small cap leadership is a sign that investors are more optimistic on the economy and willing to assume more risk. The Russell 2000 Small Cap Index ($RUT) has yet to achieve a new high. I've pointed out in the past, however, that the SML has a history of leading the RUT higher.
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Chart 4
HONG KONG ISHARES REACH TWO-YEAR HIGH ... Emerging markets ended the week on a strong note. I keep reading that Chinese stocks have not participated in the EM rally. That may be true in Shanghai, but not in Hong Kong. The green line in Chart 5 shows Hong Kong iShares (EWH) ending the week at the highest level in a year. I recently suggested that a more stable Hong Kong dollar was attracting money (versus mainland stocks that are denominated in Chinese yuan). A more international audience and better liquidity is another factor. So is the fact that Hong Kong stocks yield 3.5% which makes them attractive for yield-chasing investors. I believe it's just a matter of time before mainland Chinese stocks start rising as well. The red line plots the CSI 300 China A-Shares ETF (ASHR) which just recently hit an eight-month high. Rising A-Shares would be good for emerging markets.
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Chart 5
EAFE ISHARES HIT TEN-MONTH... Emerging markets aren't the only foreign stocks to have a good week. Chart 6 shows the MSCI EAFE iShares (EFA) closing at the highest level in ten months. [EAFE stands for Europe Australasia and the Far East]. This week's upside breakout lends more "breadth" to the global rally. Some of the week's biggest EAFE gains were in Europe and Japan.
